Servitization: A Competitive Advantage

It is not a secret that all of us as clients, whether as end consumers or as part of a company of any size, seek solutions to our current problems and to our own or organizational challenges for whatever reasons.

Customers not only look for a product that solves a problem, or at least comes close to the solution, they expect much more. They want to be understood.

The key is to focus on the customer experience, where we can find a clarifying understanding of what is and is not important to that person or company. When the problems, challenges and priorities of our clients are understood, the possibilities of generating solutions are easily opened to help them, fundamentally considering their benefits.

For those companies whose main focus is the sale or distribution of products, I recommend planning the evolution of their business strategies toward what is called servitization. This concept is very well described in a blog on the Wegetit site titled, The servitization of the industry: from product to service:

“Process through which companies that usually focus solely on the manufacture or distribution of products, redefine their business strategy and evolve toward a model based on the provision of services.”

The importance of considering servitization can be seen in two studies:

• According to the servitization impact study, “How UK-based manufacturing organizations are transforming themselves to compete through advanced services,” Aston Business School (2013), the servitization of the industry can help customers reduce their costs by 25-30 percent.

• According to Livework Studio, adding services to the product portfolio results in annual revenue growth of 25-50 percent. And companies that have chosen to offer product-service packages increase their customer retention and loyalty.

Already in the 1970s, there was an understanding that services were an essential part of the manufacturing world, as is evidenced by a quote   from Theodore Levitt in 1972:

“There are no such things as service or industrial sectors. All sectors have service components, only that this component has a greater weight in some than in others.”

The term “servitization” was coined in 1988 by Rada and Vandermerwe when they observed how manufacturing companies were adding more and more services within their business strategies to increase and capture added value in their proposals. They named the process of value creation by adding services to the product offering as “servitization”.

Among commercial offers, we find at one end the offer of products exclusively and at the other end, that of services exclusively. Among them are what are called function-oriented business models or product–service systems (PSSs). PSS aims to redefine business strategy toward a model based on services around a product.

Arnold Tukker (2004), in Business Strategy and the Environment, said:

“At least eight different types of PSS exist, with quite diverging economic and environmental characteristics. The economic potential of each type was evaluated in terms of (i) tangible and intangible value for the user, (ii) tangible costs and risk premium for the provider,(iii) capital/investment needs and (iv) issues such as the providers’ position in the value chain and client relations.” 

The eight different types of PSS can be grouped in three categories, whose implementation strategy can be carried out sequentially as you learn through each of them or directly according to the capabilities and maturity of the company and the product. It will also depend on the company's ability to show its value and the maturity of the market in being able to accept the business model.

Product Support Services

The sale of the product continues to be the main objective of the company, and is complemented by services linked to the product, such as corrective maintenance, consultancy or advisory.

It is about expanding the offer without major investments or organizational changes or changes in the production structure.

Some changes could be made to the product to make the service more competitive.

Use Access Services

The traditional product remains the central element but it is no longer its sale that is most important, but rather the way in which the customer makes use of it. For example, leasing, renting/sharing or pooling.

In this case, control of the product is not lost throughout its life cycle. It is about maintaining a constant income of capital and decreasing the number  of fixed assets.

Most likely, the product must be redesigned to be able to extend its useful life to the maximum in order to obtain the greatest benefit; therefore, the manufacturing of this new product will have a higher cost.

Access Services by Result

The product is still involved, but the transaction is based on the result to be obtained. The client and provider focus on reaching an agreement as to what is to be achieved. The possibilities are payment for use or payment for results, among others.

Alliances are established with clients and risks and benefits are assumed; personalized demands are accessed.

The product undergoes a radical redesign looking for new eco-efficient ways to satisfy customer needs.

Up to this point we have not discussed how disruptive new technologies can catalyze the servitization drive. IoT allows us to know how products work and how each customer uses them. Big data helps us to store all this information and the application of artificial intelligence allows the exploitation of the data and its analysis. With the use of all these technologies, we can build new business models, digital businesses above all, giving our clients what they need through clear knowledge of their processes and needs. We will discuss this point another time.

I’ll end with a reflection by way of the words of a great friend, David Romero, a specialist in digitization of manufacturing and digital transformation, taken from one of his notes, Servitization of manufacturing. A strategic alternative or a new requirement for the manufacturing industry in both Mexico and in Latin America? (2022):

In addition, this current incipient maturity of servitization in Mexico and Latin America is quickly becoming  insufficient for many clients in the region, particularly capital goods, as they observe a growing proliferation of providers of "industrial product-service systems" in other regions of the world to which they could have access thanks to the trend of “digitalization of the servitization of manufacturing.”

Due to the above, it is important to call on national and regional companies to begin immediately at least to explore and, if possible, implement "servitization" and "digital servitization" strategies of manufacturing as a new source of competitive advantage. 

References:

[1] Romero (2022). Servitización de la manufactura. Extraido de México Industry 13 de noviembre de 2022. [LINK]

[2] Insausti (2019). Modelos de negocios digitales. 

[3] Tukker (2004). Business Strategy and the Environment.

[4] Wiley y Sons. (2004). Eight types of product– service system: eight ways to sustainability experiences from suspronet.

[5] Wegetit (s.f.). “La servitización de la industria: del producto al servicio”. [LINK]

[6] Livework studio (s.f). Magazine Services Transformation. [LINK]

[7] The Manufacturer (2016). Servitization: changing the face of the manufacturing future. [LINK]